It’s almost time to celebrate Christmas. Whether you’re planning a staff party or getting ready to show your customers your appreciation with a gift, it’s still essential to follow the tax rules. For one thing, it means that you don’t have to have an awkward conversation with your accountant because that expense you thought was tax-deductible is actually taxable.
Here’s our guide to celebrating Christmas and staying on the right side of HMRC.
The Christmas party
A good Christmas party is great for staff morale, letting them celebrate the end of a busy year with their colleagues over a good meal and a few drinks. The good news is that all businesses with employees can claim a tax exemption for staff entertainment as long as certain conditions are met. If the total cost does not exceed £150 per head, including spouses/partners, then the tax exemption will apply.
Warning: if the total cost exceeds £150 per head, then no tax exemption will be allowed.
The costs can include food, drinks, entertainment, transport and accommodation. It’s important to remember that your party will only be tax-exempt if it’s available to all staff and it’s annual. You can throw a party for a single team or management only, but you won’t be able to claim it as an allowable expense on your accounts.
Entertainment for clients and associates is not allowable for tax purposes.
Gifts to your clients
It’s been a tough couple of years to run a business, so it’s a great idea to thank your loyal customers with a Christmas gift. Unfortunately, they’ll only be tax deductible if used for marketing purposes. If you send a large gift or one that includes alcohol, food or tobacco, it’ll be classed as client entertainment which can’t be claimed as a business expense. The only exception is if you sell those goods in your business.
On the other hand, if you send your customers a gift with your company branding, this is treated as a promotional item, so it will be tax deductible.
Gifts to employees
Your clients aren’t the only people who can benefit from a Christmas present; you and your employees can too. Gifts to employees could be considered a taxable benefit or even a benefit in kind. It’s important to keep a close eye on the value of any employee gifts and how many you give throughout the year.
Generally speaking, if you send a single Christmas gift worth up to £50, it will be classed as a trivial benefit exemption. This means it won’t attract tax or NI and will be tax deductible. The gift can’t be in cash, or it’ll be taxed as an additional salary payment. It also can’t be offered as a reward for performance or because of a clause in their contract.
VAT
If you send Christmas gifts that attract VAT, you can claim the input VAT on gifts for both clients and employees. However, if you spend more than £50 sending gifts to any individual within a 12-month period, you’ll need to charge output VAT on your total spend.
Depending on the costs involved, it can be simpler not to claim the input VAT if you think this is likely to be an issue. Alternatively, you could send a free product sample to your customers, as you won’t need to account for output VAT.
You can find out more about HMRC’s approach to taxation on gifts and Christmas parties here: https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim45065.
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